* NSE, BSE indexes both fall 1.7%
* Banks, auto stocks top losers
* PSU bank index hit by merger move (Updates shares, adds analyst quote)
Sept 3 (Reuters) - Indian shares extended losses on the first trading day of September, as sentiment soured after data last week showed the economy grew at its weakest pace in over six years.
The broader NSE index fell as much as 1.67% to 10,839.50 on Tuesday, while the benchmark BSE index also dropped 1.67% to 36,710.490. Indian markets were closed on Monday for a public holiday.
The Indian economy, the third largest in Asia, expanded just 5% year-on-year in the three months ended June - the lowest pace since March 2013, official data showed on Friday, far below the 5.7% forecast in a Reuters poll.
“This data has shown that growth is much slower than we expected,” said Siddhartha Khemka, head of retail research at Motilal Oswal Securities, adding that the slowing private consumption was a major worry.
Adding to the worries, a private sector survey showed that the country’s manufacturing sector grew at its slowest pace in 15 months in August.
Some analysts also said that the government’s measures over the past week to encourage investment may not be enough to lift the economy out of the downtrend.
“While the market is expecting the government to boost spending to revive demand, the economy is not giving much legroom to do that,” Khemka said.
The Indian rupee weakened sharply to a mid-December low of 72.37 against the dollar, versus its close of 71.41 on Friday.
Finance stocks were hammered the most, with the Nifty PSU Bank index, which tracks the country’s state-owned lenders, tumbling as much as 4.1%.
The government announced a series of mergers involving 10 public sector banks to boost the struggling sector and revive economic growth.
Shares in Punjab National Bank, the biggest lender among the 10 banks, slumped 8.6% to their lowest since Oct. 1.
Private-sector lender ICICI Bank Ltd slid 4.2%, its sharpest intraday drop in nearly four months, and dragged the Nifty Private Bank Index 2.1% lower.
IDBI Bank Ltd was a bright spot, jumping 14.4% after the cabinet approved a plan to infuse over 90 billion rupees in the lender.
Automakers also dropped after reporting a slump in August sales.
The Nifty Auto index fell as much as 1.7%, with Tata Motors Ltd dropping 4.7% and Mahindra and Mahindra Ltd declining 3%.
IT stocks were among the gainers on the NSE index, bolstered by the weak rupee. Tech Mahindra Ltd climbed 3.4% to a near 10-week high. (Reporting by Chris Thomas in Bengaluru; Editing by Rashmi Aich and Sriraj Kalluvila)